MENU
Finn Products, a start-up company, wants to use cost-based pricing for its only product, a unique new video game. Finn expects to sell 10.000 units in the upcoming year. Variable costs will be $65 per unit and annual fixed operating costs (including depreciation) amount to $80,000 Finn's balance sheet is as follows:
If Finn wants to earn a 20% return on equity, at what price should at sell the new product?
The net income Finn will require is calculated as follows:
Return on equity = Net income + Equity
Net income = Equity x Return on equity
= $300,000 x 20%
= $60,000
The necessary selling price can then be derived:
Net income = [(Selling price - Variable costs) x Units sold] - Fixed costs
Selling price = (Net income + Fixed costs + Variable costs) Units sold
= ($60,000 + $80,000 + $650,000) 10,000
= $790,000 10,000
= $79 per unit